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Highlights of India’s New Foreign Trade PolicyIndia’s official merchandise exports target for 2014-15 is $340 billion; however, India is likely to miss this target, and the actual figure is only going to be about $310 billion (if one includes services exports, the figure is likely to be about $466 billion).The reasons for decline in merchandise exports include slowdown in manufacturing, softening of metal and commodity prices and declining competitiveness of domestic goods in international markets. The continuing global economic slowdown (and especially in the USA and EU), and turmoil in the Middle East, are also causing this. In this backdrop, the new FTP (that will run till 2019-20) ambitiously aims to bump up exports to about $900 billion. This would mean that India’s share in world trade will have to rise from the current 2% to 3.5% (all of which amounts to about 23% CAGR in exports. Between 2001 and 2010, exports grew at about 22% CAGR. It is unclear whether the $900 billion target is solely for merchandise exports, or merchandise + services; if we include services, required CAGR is only about 11.5%. I think the target is inclusive of services, as all news reports keep saying that the FTP aims to ‘nearly double’ the exports).However, according to WTO, the worldwide trade growth in this fiscal is only likely to be about 3%, and worldwide trade has been slowing down for quite some time. In such circumstances, it will be very hard to achieve these targets. Moreover. India’s exports in the last 11 months (till February) grew only by 0.88%! There appears to be a secular stagnation in global growth that stacks the odds against us building an export-oriented economy. Also, although China might be experiencing a slowdown on the back of rising wages, but whatever manufacturing activity that shifts out of China because of this is likely to go to other ASEAN economies given that they have well-integrated supply chains, and not to India. Also, exports declined in 2014-15 fiscal by 1.2%, and imports by 0.6%. This is largely on the back of weakening global demand, and not many rapid changes in India’s labour and land laws.The thrust of the new FTP is on export promotion, reducing trade transaction costs, e-commerce, services exports, and ease of doing business in India. The FTP seems to be in sync with other government initiatives such as Make in India and Digital India. It has been declared that the FTP will not be reviewed annually, but only after 2.5 years, thus guaranteeing stability to exporters. A key highlight of the FTP is that it has done away with a plethora of schemes that used to exist for export promotion and has announced much more simplified two schemes: these are Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS). MEIS clubs all other incentive schemes, and replaces them. The rate of incentives has been reduced from 2-7% to 2-5%, which the exporters don’t like and have requested be rolled back in face of a likely decline in exports this year.MEIS exports with high domestic content and value addition will be provided a number of benefits. Also, firms that source their capital goods from Indian manufacturers will be granted exemptions from export obligations; this is expected to give a boost to domestic capital goods industry. The Export Promotion Capital Goods Scheme (EPCG) allows duty free imports of machinery and parts against an undertaking that a firm will export a specified amount within a stipulated time. The new FTP reduces the export obligation to 75% from 90% in the EPCG scheme. This is for exporters who opt for domestic procurement over imports, and is geared towards reducing export dependence. Under domestic imports, the export obligation will be 6 times the duty saved on capital goods. Under?MEIS, the main sectors to be provided?support?includes processed, packaged?agricultural?and?food?items,?agricultural?and village?industry?goods. SEIS will be available to ‘service providers located in India’ as against ‘Indian service providers’.Special emphasis is being laid on promoting defense, pharmaceuticals, and environment-friendly products. Exporters of these products will be given specific tax breaks for manufacturing and trading purposes.FTP has also provided higher level of incentives for export of agriculture products (including attempts to boost exports of processed and packaged food items with better branding and quality control assurances)Export obligations will be reduced by 25%Duty credit scrips will be made freely transferable and usable for payment of custom duty,?excise?duty, and?service?tax (under MEIS)In an effort to shore up the fledgling performance of the SEZs (which have been criticized by the CAG as being ineffective and in many cases simply turning into no more than fraudulent land deals), both MEIS and SEIS will be extended to SEZs as wellApart from focusing on rationalizing tariff structures to enable India to be a part of mega regionals like the TPP, the FTP has also emphasized reviving multilateral systems such as the WTO. Thus, the policy makes a move towards phasing export subsidies (which WTO wants) by reducing the number of schemes that provide such subsidies. Similarly, to be internationally competitive, the policy also states that Indian goods needs to be top-quality, and need to be branded properlyExpressing concerns over two mega free?trade?agreements TPP and TTIP, of which India is not a part, the government?said the?Indian?industry?needs to gear up to meet challenges that would emerge from these pacts The mega agreements are bound to challenge India’s?industry?in many ways, for instance, by eroding existing preferences for?Indian?products?in established traditional markets such as the US and EU and establishing a more stringent and demanding framework of rulesGovernment said that the focus of India’s future?trade?relationship with its traditional markets in the developed?world?would be on exporting?products?with a higher value addition, supplying?high?quality inputs for the?manufacturing?sector?in these markets and optimising applied customs duties on inputs for India’s?manufacturing?sectorThere is a need to simplify and ease rules of origin criteria to position?India effectively in?global?and regional value chainsIndian?industry?has raised concerns over these FTAs saying that it is benefiting more to the partner countries with which?India?has implemented such pacts.Another announced measure is setting up of an Export Promotion Mission to provide an institutional framework to work with state governments to boost exportsAnother notable feature is trade facilitation and ease of doing business by way of online filling of documents and emphasis on paperless trade. The government will also provide incentives to e-commerce firms exporting products from sectors that create jobsFTP has also proposed new institutions to boost global trade:Setting up of a?host?of institutions, including?Trade?Council and National Committee on?Trade FacilitationPursuant to the WTO agreement on?trade?facilitation, the policy has proposed setting up National Committee on?Trade?Facilitation. That pact is aimed at easing customs procedure to reduce transactions?cost?for traders.The Niryat Bandhu Scheme, which provides mentoring to people who’re just starting out in exports, will be revampedA new?institution, Centre?for?Research?in?International?Trade, is being established to strengthen India’s?research?capabilities 2 institutional mechanisms are being put in place for regular?communication?with stakeholders – the?Board?of?Trade?and the Council for?Trade?Development?(CTD) and Promotion; while the?Board?of?Trade?will have an advisory role, the CTD would have representation from State and UT governments-----The search for new markets such as Latin America, Africa and CIS is obvious and timely as India’s traditional export destinations such as the U.S. and Europe are still recovering from the financial crisis. However, Indian business will remain hesitant in investing in CIS and other Central Asian countries until?India’s connectivity with these areas improves and sanctions against Iran and Russia are removed.The acknowledgment that India is being left out of global mega trade agreements such as the Trans-Pacific Partnership indicates that the government is taking those developments seriously. Not only does India risk losing export markets if those agreements come through, but it will also be left out of new trade paradigms that these agreements are introducing such as the focus on harmonising sub-national regulations on intellectual property, environment and labour.Hence, the focus on improving the domestic environment by streamlining schemes and developing competitive products is appropriate.Similarly the focus on Services, which is India’s key competency, is timely. The free trade agreement in Services with ASEAN is expected to be a game-changer.However, the foreign trade policy cannot be looked at in isolation – it’s alignment with India’s economic diplomacy goals is not clear and is thus likely to diffuse the efforts for India to have a comprehensive and powerful foreign policy.The government has also not been explicit about the support for small and medium enterprises, which create 1.3 million jobs every year and contribute to 45% of the country’s industrial output. ................
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